If you thought Carnival (NYSE: CCL)(NYSE: CUK) the stock recovery was over, think again; it’s just getting started. While the stock is up 90% from its 2020 lows, the company is still 77% off its pre-pandemic highs.
And those highlights weren’t inflated, unreasonable highlights. They reflected an industry leader with market-beating performance, strong opportunities and a competitive dividend.
Now that Carnival has emerged from the lows and is showing robust performance, why can’t it rise again? Let’s take a look at what’s happening at Carnival and where it might be a year from now.
Sales: Rising
Sales are already at record highs, but they continue to climb. The rebound in demand is incredible, and while there are concerns that it will eventually calm down, it hasn’t happened yet. Revenue for the fiscal second quarter (ended May 31) was an all-time high of $5.8 billion.
People want to cruise, and the momentum is so great that Carnival is in the best position ever for the remainder of the year, both in terms of occupancy and price. The company is already booked solid at high rates and high prices well into 2025. Management has rebranded some of the fleet to meet the increased demand and to operate more efficiently.
Demand is likely to slow this time next year, and there could be some bumps as it stabilizes at pre-pandemic levels. But Carnival could also benefit from slowing inflation and lower interest rates, which are expected to be cut later this month, leading to even higher demand.
Profit: Improvement
Carnival was a very profitable company before the pandemic, but it’s still trying to bounce back. It has now posted positive quarterly net income on a generally accepted accounting principles (GAAP) basis twice in the past year, including a second-quarter report of $92 million, up $500 million from a year ago.
Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) were $1.2 billion in the second quarter, up from $681 million a year ago. Management forecasts adjusted EBITDA to increase 40% for the full year.
Even Carnival’s net losses are hovering around zero, and the company is closing in on reliable profitability. By this time next year, Carnival could be out of the woods altogether and posting annual profits. Analysts are expecting $1.19 in earnings per share (EPS) in 2024 and $1.55 in 2025.
Debt: Shrinking
The big problem with Carnival right now is its massive debt. It has always carried a portion of debt as part of its operating model; that’s not unusual for established, dividend-paying leaders in the industry. But cruise companies have taken on a huge amount of money to stay solvent, and that relies on the availability of cash, which creates risks.
While there is no new pandemic or other global phenomenon expected to wipe out Carnival again, the company is susceptible to problems or changing trends. That is why investors are so concerned about the possibility of declining demand. If revenue growth does not continue, Carnival’s debt service could be in jeopardy.
So far, so good. It has paid down debt as quickly as possible, while preserving its operating and cash reserves. The company ended the quarter with $4.6 billion in liquidity after paying down another $1.6 billion and restructuring some of its debt to optimize its position. It is using cash from operations, which was $2 billion in the second quarter, and adjusted free cash flow of $1.3 billion.
Over the next year, watch for updates on how management is handling debt service and liquidity. The company should continue to pay these off through healthy operating and free cash flow.
Rating: Bargain
Carnival shares are trading at bargain prices because of the debt. The price-to-sales ratio is 0.9 and the forward price-to-earnings ratio (P/E) in one year is just 10.
As Carnival generates higher profits and reduces its debt, it won’t stay this cheap forever. If you have a little risk appetite, Carnival stock should be higher next year and reward you in the long run.
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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool recommends Carnival Corp. The Motley Fool has a disclosure policy.
Where Will Carnival Stock Be in 1 Year? was originally published by The Motley Fool
